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Claiming Surplus Funds After a Tax Sale

Posted by 15789465 on

When there is a tax sale of real estate in Alabama, and the bidding exceeds the taxes due on the property, who gets the "surplus funds" or "excess funds?" The owner of the property at the time of the tax sale is entitled to the surplus funds. It could be many tens of thousands of dollars.  The owner simply applies to the county for the money, provides his/her identity, and receives the money.  Yes, there is a drawback. If that same person later attempts to redeem their property from the tax sale, they will have to repay the surplus funds as part of the redemption price. For some people, that is not a problem. They have no intention of redeeming, or they desperately need the cash NOW and will worry about redemption later.  A lot of tax sale investors actively seek out such people and partner with them to claim the surplus funds. That could all change very soon.  It is because of a lawsuit in Tuscaloosa in which a borrower did not pay his mortgage, and also did not pay his taxes. The tax sale generated over $30,000 in surplus funds. Slightly over a month later, the bank foreclosed on the property. The bank learned about the tax sale, attempted to redeem, and learned at that time about the surplus funds. The owner/borrower, and the bank, both claimed the surplus funds. The owner said he was entitled to the money, under the statutes. The bank had two arguments why they should get the money. (1) Because of how mortgages technically work in Alabama, the bank was technically the owner of the property as soon as it was mortgaged, so they were the "owner" entitled to the money under the statute; and (2) It wasn't fair that their borrower should get over $30,000 in cash, and the bank should be stuck with having to spend an additional $30,000 to redeem the property in order to protect their foreclosure rights. The court said to the bank: "(1) Nice try, but that technicality doesn't matter in this situation and (2) You banks are big boys, if you wanted to protect yourself against unfair results, you could have easily put something in your mortgage, but you didn't, so too bad."  (I'm paraphrasing, of course!) Now the bankers are trying to get the law changed. They are pushing for a change to the law, so that the surplus funds can be claimed only by the party who redeems. In the Tuscaloosa case mentioned above, I think that would have been a fair result. BUT, what if there is no mortgage on the property AND the owner does not want to redeem for some reason, or intends to redeem later, but needs the money RIGHT NOW, what happens then? Well, under the proposed law, nobody ever claims the money because nobody ever redeems, and the county gets to just keep it. Pennies from heaven. Under the proposed law, it's too bad for that owner.  That is an unfair result, in my mind. We should not allow bankers to push through legal changes to protect themselves, without giving any thought to bad consequences in situations in which no banks are involved.  Please talk to your state legislators, and tell them they should revise the proposed law so that if there are no mortgages or other liens on the property at the time of the tax sale, then the owner can claim the surplus funds, whether he/she redeems or not.

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  • The banks are no doubt letting everyone know they are the big boys. In this case they change the law if it does not suit them. Investors are already having a hard time with the County Development office that has forced a maintenance bill on them, which the banks will not reimburse at redemption either. Something needs to be done to level the playing field.

    O. Lister on
  • Thanks, John, for identifying the identity of the bill that DID pass. I see your point, and am now reversing my opinion regarding the banks getting the surplus funds. I used to think it was fair if the mortgage lender got the surplus funds. But you are right—the manner of then getting that money, through the amended law, is unconstitutional. If banks want to include any possible surplus funds in their collateral, they can easily write such language into their mortgages and file a UCC-1. They shouldn’t lobby to get a law changed, and also take money away from owners who do NOT have any liens on their property and will not redeem. Maybe one of the public interest watchdog groups will file a lawsuit challenging the constitutionality of the new law.

    Denise L. Evans on
  • Senate Bill # 197 died in committee. However, House Bill #47 introduced by representative Clouse, ( which is basically the same, passed and will become law August 1st 2013.

    My opinion:
    A tax sale is tantamount to a public auction and the excess funds are the personal property of the owner selling the real estate They belong to the owner prior to the sale and the auctioneer (the County in this case) owes the money to that owner/seller.
    This revision of §40-10-28 amounts to theft of personal property or at least the taking of personal property, not for the benefit of the people, but, instead for the benefit of a third party, and all without due process in a blatant violation of the 5th Amendment to the U. S. Constitution.

    john wacker on
  • This was SB 197 introduced by Senator Cam Ward. I’m letting you know this so you can follow up, also, if you want. It does not appear that it passed. It looks like it was held up in committee and never came to a vote. I’ll check again in a few days and let everybody know.

    Denise L. Evans on
  • Did they Vote on this and what was the outcome?

    kat on

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